September proved to be an interesting month for stock markets. The Evergrande crisis sent many investors into panic mode as the S&P 500 fell by 5.2% between Sep 2 and 20. On top of this, China announced a national ban on cryptocurrencies, which lowered the value of many stocks related to the digital asset.
While the rocky month of September has now come to an end, investors shouldn’t let their guard down anytime soon. October is commonly known as the most volatile month for the stock markets and here’s why.
What is the October effect?
For almost 100 years, October has proven to be an uneasy month for stock markets. On October 29, 1929 (Black Tuesday), the New York Stock Exchange fell by 90% in an event that went on to trigger the Great Depression. Almost 60 years later, ‘Black Monday’ occurred on October 19, 1987, a day that saw the Dow Jones Industrial Average fall by 22%. Then, on September 29, 2008, the global stock market plunge due to the financial crisis started and continued throughout the first week of October.
It is these major events, along with annual volatility in markets during the month, that inspired the ‘October effect’. The October effect refers to the expectation that markets will experience volatility during the month of October each year.
The effect is widely debated within the investing space, with many arguing that it is purely a psychological expectation rather than an actual phenomenon. However, you don’t have to be a top-level analyst to notice that October does have a history of stock decline. The market volatility in October can be explained by the annual events that take place around the time of year.
It is thought that many stock market analysts and traders will return from their summer vacations and begin to make major trades after Labor Day. Labor Day occurs at the beginning of September, meaning that the uptick in volatility – caused by these major trades – will be in full effect by the time that October rolls around.
The beginning of the US financial year
October 1 marks the beginning of the US financial year. During this time, the government will make changes to their budgeting and release plans around tax, savings accounts, and pensions. The changes that are made at the start of the financial year can cause huge movement in the stock market, making it a volatile time for traders.
Third-quarter return reports
Some companies around the globe hand in their quarter reports according to a three-month cycle that puts October at the beginning of the fourth quarter. Some believe that the October stock market volatility is caused by third-quarter return reports, which are handed in at the end of September.
Quarter reports provide a glimpse at how a company’s stocks may be valued in the future. When the reports are released, analysts and traders are quick to react to value predictions, which can trigger market volatility.
How to trade in a volatile market
If October 2021 continues the volatile trend, you may need to take a look at your trading strategy. A volatile market poses a high level of risk and the market will be largely unpredictable. Here are a few tips for trading in a volatile stock market.
- Be aware of the increased risk before making any trading decisions.
- Focus on trending stocks.
- Look for breakouts that could signal a new up-leg.
- Don’t be afraid to wait for the markets to calm down.
- Adjust your trading budget to put less capital at risk.
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